China’s Social Security Tax Reform Expected to Have Major Effect on Public Consumption

A woman walks past a sale sign at a fashion outlet in a shopping mall in Beijing on July 15, 2015. (GREG BAKER/AFP/Getty Images)

September 11, 2018By Sunny Chao

China’s state taxation services will uniformly collect all social security taxes, starting in January, in an effort to counter tax evasion and cover increasing shortfalls in social insurance funding.

Previously, those taxes were collected by different agencies and authorities across China, and loopholes in the systemallowed many businesses to dodge the levies.

China’s social security system mandates that taxes are paid by both employers and employees, the latter typically doing so through paycheck deductions. The change is expected to significantly increase the operating costs of small- and medium-sized enterprises, according to the latest report from Guotai Junan Securities, one of China’s largest investment and securities companies.

The report, released on Sept. 4, projects that companies will pay an additional 1.5 trillion yuan in taxes per year, reducing their earnings by about 13 percent. As the reform tax plan increases corporate operating costs, it essentially passes these burdens to the employees, whose consumption will in turn decrease—by roughly 1.2 trillion yuan ($175.77 billion).

The average social security tax rate in China’s 31 provinces and self-governed municipalities is 39.07 percent, so the total social security funds that were supposed to be collected in 2017 stood at 8.6947 trillion yuan ($1.27 trillion), according to the report. However, the actual total collected last year was only 6.7154 trillion yuan ($976.9 million), meaning that about 2 trillion yuan (about $300 billion) in taxes went unpaid by companies and individuals. The Chinese regime is mandating that that amount be fully paid once the new policy takes effect in 2019, according to the report.

If the Chinese regime seeks to have the fees collected in a short period of time, it will be a huge burden to individuals and businesses, the report added.

Fewer companies are paying their full share of taxes. In 2015, about 40 percent of companies paid all their taxes, compared to 25 percent in 2017, according to a 2017 white paper released at a state social security conference. More than 70 percent of companies fell short on social security payments.

Exorbitant Fees

The social security tax rate in China is very high when compared with most countries at any level of development. For instance, the corporate pension rate in China is about 20 percent, compared with 8.25 percent in Japan, 9.3 percent in Germany, and Sweden’s 9.25 percent; the rate is 6.2 percent in the United States.

According to the study by Guotai Junan Securities, the percentage of pre-tax income for Chinese companies and employees that must go to various forms of insurance is double that of the global average.

Aging Demographic Exacerbates Social Security Woes

Pension deficits are worsening as the Chinese population grows older. There is currently a 1.2-trillion yuan shortage in pension payments, according to a state report.

Demographic forecasts show that by 2020, more than 255 million Chinese will be aged 60 or older—almost 18 percent of the total population. By 2030, the figure will rise to 320 million.

However, the government is paying current pensioners using funds contributed by people born between the 1970s and 1990s. It is unclear how their pensions will be funded when they reach retirement age.